All You Need to Know About the Blockchain
Does it bother you when almost everyone around you talks about things that are completely out of your area of expertise? They use some strange-sounding terms with a businesslike look on their face and it makes you even more annoyed. You capture only some words like blockchain, Bitcoin, and the like, but as a whole, you can’t decipher this babble even if this theme sounds interesting to you. So, a simple and easy-to-understand explanation would be just what the doctor ordered, right? I think so, too. That’s why you are in the right place to get everything you need to know about the blockchain to get rid of those smug-looking know-it-alls.
Some experts consider it to be the most influential technology for decades to come and even call it the “next generation of the Internet.” Thanks to significant the media attention the blockchain gets nowadays, the concept is expected to be relatively simple to perceive for laymen. But in real life, it’s a bit more complicated. So, I invite you to join me on my journey to explore the fundamentals of the blockchain and its derivatives — smart contracts, distributed ledger, Bitcoin, and many others.
How it Was Before the Blockchain
To figure out what the blockchain is, it’s necessary to understand how things were back in the days this technology was out of the picture.
Our day-to-day operations generate constant data flow. When you use your credit card to transfer some money for your dear nephew or send a contract to your partner to sign, you send them a copy, not an original. And if, in the case of a Word document, it’s possible to have two exemplars of a file (the original version and the one you sent), some other assets (like money) can’t be duplicated. So, everyone must be sure that after you made a payment, you don’t have another version of the same currency that can be transferred to someone else.
Traditionally, we rely on some mediators, like banks, that hold all the data in one database or data center. It has the only copy of data, and, in theory, everyone involved has access to it. Reality is a little bit different and more complex, however.
Apart from the fact that we must trust those intermediaries when submitting our info, there are problems that appear over time. The fact that everything is stored in one place (meaning it’s centralized), makes it vulnerable to attack. Also, as in the case of the above-mentioned contracts, two sides can’t work on the same document simultaneously, which creates problems of versions that might be lost, files moving here and there between the recipients, and other inconveniences such as time delays.
Blockchain’s Arrival (Bonus: What it is)
To solve the problems mentioned above, research scientists Stuart Haber and W. Scott Stornetta in 1991 started working on a cryptographically-secured system where timestamps of the docs could not be adjusted or backdated. The first significant results in the field of the blockchain were, however, achieved more than a decade later by Satoshi Nakamoto when he used Haber and Stornetta’s ideas to develop Bitcoin’s infrastructure.
In some way, blockchain introduces a new method for things to be done: every node can see all transactions that are happening in the system and should receive a copy of each of them to update its data and, essentially, approve it.
Basically, it is just a new way of storing data. The only thing that separates it from the already existing technologies for data storage is how the whole process is done. The blockchain is built on the principle that all information should be distributed across numerous locations instead of just one, using the highest level of cryptography. It means that all participants are connected to each other and have the same copy of the given data. If you have used torrents in the past, you probably noticed some similarities.
How Blockchain Changes the Process
As a result, technology gives us a decentralized version of the database or a digital ledger of transactions that are available to anyone in the network. It allows users to utilize peer-to-peer communication with one another by bypassing third parties (data storages) in almost any operation.
But this creates a lot of work for each participant individually. The problem is solved by a special group called “miners” who get tokens (Bitcoin or other digital currencies) for dealing with the issue. With the help of their hardware capacities, miners create information blocks that store all the transactions occurring in the system at a given period of time and verify them.
I won’t dive deep in the process, but basically, it involves solving a computational problem (see infographics below for a more detailed explanation). These blocks are then added to already existing ones creating a chain (hence, the name) where all information is kept in chronological order and can be easily accessed (which makes it genuinely public).
Once you become a part of the system, you are given two keys: public (your address or, for the sake of simplicity, your username) and private (your password). In other words, a hacker can’t commit any misdeed because he or she should find and alter a specific block plus all the preceding ones, but as you already know, all the blocks are located across all the existing computers, simultaneously. On top of that, they are encrypted with special mathematical functions (user’s private keys). With such an elegant and, at first sight, inconspicuous technique, the vulnerability problem becomes almost irrelevant.
Cryptocurrencies
Now, in 2018, it became a form of an asset that can be invested in for people who are seeking lucrative opportunities and not afraid to take the risk. Even though the market is highly volatile, the demand is huge. Cryptocurrency is a form of digital currency that uses encryption techniques to regulate its amount and validate funds transfer, operating independently of a central bank.
No one in 2009, the year Bitcoin appeared, would have thought that 9 years later more than 1,900 types of cryptocurrencies would be available for everyone who is willing to give up some money in exchange for digital coins. The most popular among them are Bitcoin and Ethereum. Let’s discuss how these two are different and why they have succeeded to get a better view of this overwhelming crypto-fever.
Bitcoin was the first of many to appear that got international recognition and now, it is one of the highest valued cryptocurrencies. It’s unclear why everyone is so crazy about Bitcoin. Some say scammers make it popular because the transaction you make is anonymous and almost untraceable; others say it’s just because it’s easy to set up and you can make a payment fast, secure, and for a minimum transaction fee.
But make no mistake, Ethereum can do the same things and much more. It reaches a whole new level in an already booming technology. Ethereum is basically not only a cryptocurrency but also a centralized platform with its own virtual language. Using this platform, as a more functional and flexible tool, developers can create new blockchain applications.
Moreover, Ethereum uses smart contracts and includes a digital currency of the same name, but only as a by-product. The smart contract is essentially what it sounds like. It’s a contract that self-fulfills and executes whatever algorithm you have put into to make reaching an agreement between the negotiators easier. This tool has a potential that is probably even more revolutionizing than the blockchain itself.
Industries that Blockchain May Affect
Fintech (Banking and Payments)
Most likely, the first industry to benefit from the presence of blockchain is finance. The integration of this technology gives access to financial services for everyone around the world, including those who don’t have access to traditional banking. Compared to the usual way, which causes information to pass through a whole set of companies, each one taking its share and slowing things down, blockchain-based transactions allow you to send a remittance without any borders with almost negligible fees.
What’s more, the recipient doesn’t have to wait a couple of days to get his/her money; the whole process happens in a few moments. Some banks have already shown great interest in the technology and started investing in — or even adopting — it in order to make their operations faster, more efficient, and secure.
Insurance
The global insurance industry is a rather complex institution, and some of its functions are hard to grasp. With the use of blockchain, consumers will be able to see what they have insured, how they’ve ensured that, which party has been involved, and why they’ve received exactly that size of the payout. Essentially, it means that users could track the whole process and get a better understanding of the market as a whole and the value of the options that are open to them.
Also, by using blockchain, the entire industry may be simplified remarkably because the need for so many parties being involved will be eliminated. It will make the process more efficient, automated, and transparent in all forms of insurance, leading to a much more frictionless experience for the consumer.
Government and Voting System
This is perhaps the most important area of society that blockchain may disrupt. History has a lot of examples of when parties were accused of rigging election results. The system for legitimate vote counting, which guarantees that no votes are altered or removed, in addition to the unchangeable publicly-viewed registry, would be a huge improvement to what we have now, making elections more fair and democratic.
Keeping in mind how slow and prone to corruption the government systems are, the usage of the blockchain can significantly reduce bureaucracy and increase the efficiency and transparency of governmental operations.
Fundraising
ICO (Initial Coin Offering) is a completely new way of getting investments for your startup. There are two stages of the process — private, also known as “pre-sale,” and public. New companies who are willing to start their projects release branded tokens for private investors to receive first and most crucial financing to get the ball rolling.
This step typically involves huge discounts for those who are ready to invest, but this also sets restrictions for a minimum amount to purchase. Such a policy is implemented because of the possible massive ROI for potential investors because the pre-sale usually occurs during the planning phase. The second (public) stage takes place when a company has proved its value and now needs the money to cover operating costs, develop, or possibly even deploy a product’s prototype.
At this stage, tokens are available for everyone interested and willing to participate. All tokens bought at any point can later be exchanged for products, services, or cash. Even though these investments are far from certain, startups collect millions of dollars using this approach.
Our Identities
The whole set of tools that are offered by the blockchain makes it a lot easier to verify and manage someone’s identity or establish at least some level of trust between the parties willing to interact. As we go throughout our lives, we create shreds of information that build our virtual image. Reviews, ratings, locations, and certificates: these aren’t even a substantial part of a person’s digital footprint that you can cobble together and use to lower uncertainty about who you are dealing with.
Sounds easy, but, in fact, it’s not: this information is all fragmented because of a large number of profiles each one of us has in the net. Blockchain allows us to create an open, global platform to store all the credentials for every individual. It also means that we can protect our privacy by choosing what information about ourselves we would like to reveal, for instance, reaching a legal age or graduating from a university.
What Can Go Wrong
Even though the whole thing is rather sweet-sounding, the technology has some drawbacks that need to be taken care of.
First and foremost, the blockchain is complex and not really user-friendly. You can spend millions of dollars on software and start a massive marketing campaign to show how good your product is, but the end-users might not share your excitement. Why? Because most of the time, consumers evaluate the front-end part of the software and don’t care about the ingenious technology that makes everything work. Sounds harsh, but this is the way it is. Blockchain-powered software is far from being convenient and easy-to-use for regular users.
Because of their complex, encrypted nature, blockchain transactions can be slow, especially compared to modern credit card ones. Just for comparison, a Bitcoin transaction can take up to 5 hours to finish, which makes the possibility to pay for your dinner using cryptocurrency highly unlikely. Moreover, as they grow in size, all of these blockchains become more and more complex and unbelievably unwieldy, which will eventually make them even slower.
It offers a lot of possible solutions to common problems, reinforcing our financial security and protecting our digital identity; however, this technology is not a panacea and it is not yet well-integrated into our life, which creates certain issues.
Second, the lack of regulation creates a risky environment. Due to insufficient regulatory oversight, blockchain is a breeding ground for scammers and market manipulators. For example, a very perspective (at first sight) cryptocurrency Oncecoin, which promised its investors to become “the next Bitcoin,” turned out to be a clever Ponzi scheme that robbed millions of people of their money.
With all this blockchain madness, it has become really hard to recognize fraud, and even if you decide to stick to well-established coins (e.g. Bitcoin or Ethereum), there is no guarantee that your money will be safe. The chances that an exchange website or your online wallet (the place where you store your coins) get hacked is extremely high. Believe me, I know what I’m talking about — my wallet got hacked once; my money went to who-knows-where and all of those “highly-secured keys” didn’t help (Make no mistake here, I’m talking mostly of the vulnerability of these storages, not the blockchain itself). Plus, the government may shut down the platform you use due to some shady practices or the exchange can just “accidentally lose” your coins. And don’t think you can get justice here — everything is anonymous, so there is nowhere to go.
If you think those things can’t really be called problems, here is what really leads to a dead-end. As you have already understood, to be a part of blockchain means storing all the transactions that happened in the system at every node leading to the ever-increasing amount of information that needs to be saved and, in some instances, reprocessed and re-recorded. So, to become a part of the system, each new node will have to get a full copy of the transactions, which can take a considerable amount of time, drastically slowing things down. Plus, for new transactions to take place, you probably will have to think of prioritizing some of the deals, thus opening new ways for abusing your system, as you give incentives to process only valuable data to get a bigger reward, completely ignoring another useful one.
Conclusions
The blockchain is forecasted to influence almost all aspects of our everyday life. As Bitcoin’s price hit the record $19,783.21 in 2017, there is probably no investment opportunity more hyped up than the blockchain and its cryptocurrencies. Private companies and the general public are becoming more and more aware of its advantages, while most concerns surrounding the technology are being ignored or rebutted. Who knows, maybe the problems I explained today will not be valid for the blockchain tomorrow.
It offers a lot of possible solutions to common problems, reinforcing our financial security and protecting our digital identity; however, this technology is not a panacea and it is not yet well-integrated into our life, which creates certain issues. The unfriendly interface, the complex, encrypted nature, and wallet security are three main pitfalls that the industry has to overcome in order to become a core economy builder.
With this in mind, the business community looks more like Alice in a Wonderland of blockchain — a lot of things happen, but it is not clear what exactly and where it leads to. But, you know what, if you are willing to take a risk, you should definitely follow the world’s leaders such as Apple, IBM, and Bank of America down the rabbit hole, because there’s a strong possibility that blockchain will affect your business in one way or another. The only question is when.
